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Official export data combined with PMI data help to generate
timely estimations of global trade growth
Latest reading signals modest expansion in January 2021
Going forward, forecasts can provide further insight into the
global recovery from the COVID-19 pandemic
Given the integral role that trade plays in the global economy
and the frequency of official trade data releases, export volume
data have in recent years come to serve as an excellent barometer
of global economic conditions.
However, as is the case for many economic indicators, for export
data there is a notable gap between the end of a reference period
and the actual release of data. Aiming to reduce that gap and
provide a timelier assessment of global trade flows, we have
constructed our own global trade index using a combination of
official export data and IHS Markit's PMI export indices, which we
can use to generate timely estimates of global trade growth.
Estimating Global Trade
To produce this timelier estimate of global trade patterns, we
have constructed an export index using official export data that a)
have a limited time lag in availability and b) focus on the world's
largest exporting economies. Given the importance of the biggest
exporters in determining the overall trend for global trade, this
approach allows us to provide an accurate estimate of exports
without relying on data from some of the smaller developing
countries, where releases often have the longest lags. Moreover,
focusing on larger economies allows us to leverage the PMI export
indices to estimate current growth rates, as they provide excellent
insights into underlying global trade trends (see chart below), but
crucially are available more than a month earlier than most
official data sources.
Our index is built using official data for the world's 27
largest exporting nations and captures approximately 72% of global
export volume.1 For index construction we use a uniform approach
across all monitored countries to generate seasonally adjusted
national export volume indices. Those indices are then weighted and
aggregated to produce the global index.
As the chart below shows, the index performs well against the
widely used CPB World Trade Monitor. The CPB World Export Volume
Index exhibits a correlation of 99.3% with our series, signalling
an extremely high degree of co-movement.
Generating forecasts of global trade growth
With our global trade index limited to countries where high
frequency data are readily available, we have a basis for
generating timelier estimates of global trade flows. However, there
is currently a two-month lag between the end of a reference period
and the release of the estimate of global trade (using all 27
largest export nations that we track). To improve timeliness, we
generate estimates for two months, one for the latest month that
PMI data are available (period t) and a separate estimate for the
preceding month (period t-1) where only limited official data are
available.
For period t-1, we utilise official export data for the world's
ten largest exporting economies (as the releases for this sub-set
of countries are generally at least a month earlier than the
majority of the other countries included in the wider global trade
index). Taking the common factor of these ten official datasets
using principal component analysis, we then use simple linear
regression analysis to exploit the relationship between our derived
factor and the wider global index to generate an estimate of global
export volume. Based on out-of-sample testing for the three years
to January 2020, we calculate that these estimates of global trade
have a root mean squared error (RMSE) of around 1.3 percentage
points compared to the 'final' index number based on all 27
countries of data.
In the second forecast, for period t, official trade data are
even more limited, so we leverage an alternative indicator of trade
flows. As mentioned previously, our own PMI export indices serve as
excellent indicators of underlying export volumes in some of the
world's largest exporting economies. So, this time, we take the
common factor of the PMI New Export Orders indices for the ten
largest exporting economies in the world and again use linear
regression analysis to generate a nowcast for the latest reference
period.
Note, however, there is considerably more uncertainty with this
second estimate, with our analysis suggesting residuals are much
higher than for the period t-1 estimations (the RMSE moves to over
2 percentage points). We therefore note that initial period t
estimates should be treated with caution and interpreted as an
indication of the likely trend in global trade growth.
Latest estimates
At the time of writing, the latest reading available for the
global export trade index is November 2020, when global trade is
estimated to have increased by 2.9% compared to the same month in
2019.
Indeed, both the CPB World Trade Monitor and our own global
trade index pointed to the strongest rise in global export volumes
since March 2019. The result marked a major step in the recovery
towards pre-coronavirus levels of trade which, until November, had
been predominantly limited to China.
Using the 't-1' methodology described above, we estimate a
year-on-year contraction of -0.3% in December 2020, with a softer
rise in Chinese export volumes and a sharper decline in France the
notable drags.
Our forecast for January 2021 (period t) is for global export
volume of somewhere around 1%-2%. The main drag on growth is
expected to come from China, where January PMI data pointed to
first monthly fall in exports for six months. However, this is
likely to be partially offset by strong growth in the US, where the
New Export Orders Index hit a 76-month high. Elsewhere, Eurozone
growth remained strong, with the latest PMI export figure
little-changed from December.
Looking forward, the trend in global trade will likely hinge on
whether the recent slowdown in Chinese trade growth continues, and
whether exports in other countries continue to expand despite
ongoing coronavirus-related restrictions. An early indication of
those trends can be gleaned from the next releases of manufacturing
PMI data on the March 1, 2021. We will also continue to leverage
and report both official trade and PMI data to provide timely
estimates of global export volumes through our trade index over the
coming months.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
